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As Apple Prepares To Talk About Its Future, A Rumored Pandora Clone Seems Mired In The Past

Apple's developer conference kicks off next week, where new versions of its mobile and desktop operating systems are expected.

Next week, AppleApple holds its annual Worldwide Developers Conference, where it’s expected to take the wraps off a new version of its iOS mobile operating system as well as OS X, which powers its desktop Macs. iOS 7, at least, is rumored to be significantly refreshed under the director of Apple’s design guru, Jony Ive, a fresh look to the future for an OS that hasn’t changed its look much since the iPhone arrived now 6 years ago. But Apple itself is busy looking backwards in the days leading up to the conference, fighting a fairly irrelevant antitrust battle over e-books that it can’t realistically hope to win and gearing up a music service that sounds like little more than a clone of Pandora — which launched to the public in 2005.

Given that Apple hasn’t had a major product reveal since October 23 of last year when it launched the iPad Mini and some new iMacs, there has been a lot of pent-up anticipation among the Apple faithful and Wall Street. This product-announcement lull is something of a record in recent history for the Cupertino juggernaut, which is why so much attention is being focused on next Monday’s opening of the developer conference. And it makes it all the stranger that the Apple narrative would be around such minutiae as streaming music and e-books.

Pandora’s pox?

For a long time, Apple’s public stance has been that people just wanted to buy music, not rent it. “We’ve never offered a rental model in music because we don’t think people don’t want to rent music,” Steve Jobs said in 2008. In the ensuing 5 years, Rhapsody begat Rdio and Spotify, which all more or less offer on-demand access to millions of songs for about $10/month. And alongside them, Pandora has begun displacing terrestrial radio with its more-restrictive, mostly ad-supported service while pulling in 70 million regular listeners last quarter.

This business has proved unbelievably seductive to enter, but because most recorded music is basically controlled now by three companies, nearly impossible to make any money in. GoogleGoogle recently rolled out its own Spotify clone (coming to iOS devices soon) but there’s no reason to believe the economics are going to anymore favorable for the search giant than for the Swedish upstart. Spotify is rumored to have done about $500 million in revenue last year, but is forever hamstrung by deals that have it paying 75% of that to the record labels.

With Apple rumored to be offering better terms to the publishing side of the record companies that Pandora does (in exchange presumably for concessions elsewhere), it’s pretty clear that this so-called iRadio isn’t going to be a money maker for Apple. And starting with zero customers, it’s also very unlikely to catch up to it anytime soon — even with Apple’s marketing might behind it.

Build vs. buy

This makes the whole decision to enter the market at this late stage quite frankly bizarre. But if Apple really feels like (1) Having some kind of music streaming service is critical and (2) A free one is better than a paid one that offers more choice like Spotify, then why aren’t they just buying Pandora? An acquisition would run about $4 billion even assuming a substantial takeover premium. By way of perspective, that’s a not-entirely-crazy, less-than 7x 2014 revenues and below $60 per user. Compare this to, say, the Yahoo-Tumblr deal and the revenue multiple seems pretty cheap. (Oh, and Pandora’s CEO Joe Kennedy is stepping down, making it even easier than usual to buy the company.)

Since we’re talking music, it’s worth acting like a broken record and reiterating my general distaste for acquisitions as vanity purchases. And really this whole entry into music streaming seems like me-too-ism by Apple. If you’re going to be basically last to the party, you might as well make a splash. Nothing about the rumored Apple service seems likely to do that. In fact, a Pandora-like service is inherently limited in a Spotify world. Why? Because when I can get a playlist of specific songs from a friend on Spotify or pick nearly any track, nothing about customized radio — the Pandora (and presumably Apple) model can wow, even if its executed perfectly.

iAd, therefore iRadio

One thing Apple will be able to do better than Pandora is sell advertising that isn’t truly awful. Pandora has a huge listener base, but it’s advertising targeting technology is at least partly stuck in the middle 1990s. As a result, it has mostly “remnant-quality” advertising inventory. Apple has a lot more data about what apps you have and use, who you are, etc. on which to send more relevant ads.

The other thing Apple has is something called iAd, which was started to sell in-app advertising to help developers out and compete with a similar offering from Google. It has had mixed success at best, though, and whether a music app is going to really help make it much better remains to be seen. While advertisers are paying Pandora at the moment, there is a lot of reason to doubt that mobile ads on a music app are going to be very effective. When we’re listening, generally we’re not looking at the screen.

In the end, all the activity from streaming music seems to be generating less money for the industry than sales from iTunes, which were about $3.4 billion last year. And there is at least some evidence that streaming services like Pandora marginally encourage additional music purchases, which makes an iRadio offering a way to bolster the older, but still important music sales business. To an extent then, Apple is playing defense with this offering. While hardly exciting, there are echoes there for Apple of what’s going on in the e-book price-fixing case. More on that in an upcoming post.

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